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Robust Investor Demand Allows AUB Bahrain to Upsize Benchmark Fixed Rate US$600m Senior Sukuk as Global Issuance in 2021 Heads for Another Record Year

It is not only sovereign Sukuk issues that are keeping the momentum of Sukuk issuance in 2021, but also, multilateral, corporate and bank offerings, which thus far strongly point to another bumper year for Sukuk origination.

The latest financial institution to go to international markets to raise funds through Sukuk issuance is Bahrain-based Ahli United Bank (AUB) which in a filing to Bahrain Bourse in early September 2021 confirmed that it has successfully closed the issuance of a benchmark US$600 million Fixed Rate Senior Sukuk. The Sukuk was issued through the trustee AUB Sukuk Limited (AUBSL), a special purpose vehicle incorporated in the Cayman Islands, and was established solely to issue Sukuk certificates on behalf of the Obligor, AUB.

AUB, which has been in possible merger talks with Kuwait Finance House for the last two years, mandated HSBC and JP Morgan in August 2021 as Joint Global Coordinators to the transaction, along with Bank ABC, Dubai Islamic Bank, Kamco Invest, KFH Capital, Kuwait International Bank and Mashreq Bank as Joint Lead Managers and Bookrunners to arrange a series of calls with fixed income investors in the UK, Europe, the Middle East and Asia, as well as with Offshore US Accounts.

The initial price guidance of for the transaction was set at around 200 basis points (bps) over mid-swaps (MS). The spread was tightened after the Sukuk offering attracted in excess of US$1.3 billion in orders. The Sukuk certificates, which have a tenor of 5 years, was eventually priced at a coupon of 2.615% per annum and a spread of MS plus 175bps.

Demand for the certificates, which were assigned a BB+ rating by Fitch Ratings, as shown above was robust, which prompted AUB to upsize the issuance from US$500 million to US$600 million. According to AUB, demand was particularly strong from regional and some international investor accounts.

The certificates’ rating is in line with AUB’s ‘BB+’ Long-Term Issuer Default Rating (IDR). “AUB’s Long-Term IDR reflects a moderate probability of support from the Kuwaiti authorities, if needed despite the bank being licensed and headquartered in Bahrain. The IDR, which takes into account transfer and convertibility risks, is above the Bahraini sovereign rating (B+/Stable),” said Fitch in its rating rationale.

AUB’s Kuwaiti subsidiary, Ahli United Bank Kuwait, in which the Bahrain-incorporated parent has a 75% equity stake, itself issued a US$600 million Additional Tier 1 Sukuk in June 20321. That transaction was priced at coupon rate of 3.875% per annum. Pricing on the bond tightened from an initial price guidance of around 4.375% after investor demand for the certificates attracted an order book of over US$1.7 billion from regional and international accounts.

AUB Bahrain in July reported a net profit of US$298.6 million for H1 2021 which represents a 1.7% increase over the reported profit of US$ 293.4 million for the same period in 2020, mainly driven by an increase in net interest margins and lower provisioning requirements given the exceptional precautionary provisions raised to adjust with the heightened levels of macro-economic and sectoral risks following the out-break of the COVID-19 pandemic.

Total operating income for H1 2021 was US$552.2 million (H1 2020: US$575.6 million, -4.1%). The AUB Group’s total assets as at 30 June 2021 marginally increased (+1.0%) to US$40.5 billion (31 December 2020: US$40.1 billion) “reflecting prudent balance sheet growth compatible with prevailing operating environment in its main markets.” Return on Average Assets was sustained at 1.6% for H1 2021 (H1 2020: 1.6%). The non-performing loans ratio was lower at 2.5% (31 December 2020: 2.6%) with specific provision coverage of 83.9% (31 December 2020: 85.9%).

According to AUB Chairman, Meshal Al Othman: “Global and regional economies are showing signs of recovery encouraged by the progressive roll-out of vaccines for COVID-19. Uncertainty remains due to the risk of new mutant waves and their implications on different countries which are gradually opening up the free movement of people locally and internationally. Against the backdrop of the still evolving pandemic, AUB achieved very satisfactory performance in the first half of 2021 and is carefully planning its next steps for the balance of the year”.

“Despite the continuing general volatility, the AUB group took important steps in advancing its strategic agenda by increasing its stake in AUB Egypt from 85.5% to 95.7% through a share tender offer and through raising a very successful heavily oversubscribed US$ 600 million Additional Tier -1 Capital Sukuk issue at AUB Kuwait,” he added.

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